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A Framework For Your First SaaS Sales Comp Plan

By August 3, 2020 March 3rd, 2021 No Comments
With permission from the SaaStr Blog – Written by the founder of SaaStr, Jason Lemkin

We’ve seen a lot of different sales compesation plans during the implementation of Spiff at our clients. Sometimes they want a quick and easy translation from spreadsheets to our object-oriented system or they’re desperate to motivate their reps and ask our advice on how exactly we would do that. While every company has unique needs that fit their situation, our friends at SaaStr have put together a template for SaaS companies to follow. Originally written and continually updated by Jason Lemkin, the following structure and compensation philosophy is a great start to motivating your reps and pushing growth in your organization.

Because we built Spiff to make lives easier, this type of advice is what we love: Motivating and Generating Rep Happiness every day.

SaaS Enterprise Sales Compensation Plan

Here’s all the problems a Traditional Sales Comp plan creates:

  • Incentives for Mediocre Reps to Stay. If there’s a mediocre rep and they make a decent base, they stay put. If the quota is too high, reps won’t try to hit it and stagnate.
  • Not Customer-Centric Enough. The problem is if you only pay a rep 8-10% of a deal and then the rep goes away the second the contact is signed it’s too much of a sales factory. There’s little incentive to spend time on a $5,000 ACV customer if the commission is only $500. Customers are left floating alone very often if this happens.
  • Good Ones Didn’t Make Enough. With low incentivization, good reps aren’t driving the convertible they want.
  • Way Too Confusing. Accelerators, decelerators, micro-incentives.  Sometimes there’s decelerators that punish activity that leads to higher ARR! If a plan is too complicated, it’s impossible to champion it internally.
  • Doesn’t Maximize Revenue or Success Per Lead. The real uber-problem in a Traditional BigCo Sales Plan is designed to maximize absolute revenue across a large sales team. Great. But it isn’t designed to maximize all the leads. In the early days, every lead is precious. Especially in the early days — qualified leads are a gift. Don’t squander them.

So what do you do? Jason listed out goals as follows:

  • Make sure reps are paid a fair, market wage. The OTE has to be competitive.
  • Make sure the great reps can really make good money. M8 convertible money, not Panerai watch money.
  • Make sure the bad reps, if we hire any more, cycle out on their own. No incentives for the mediocre to stay.
  • Make sure the reps are paid to love all the prospects and customers. To spend the time to make every single customer of >$X,000 in ACV at least a big success period.
  • Not break the bank. Overall costs have to actually be equal to less than BigCo comp plan.
  • Simplicity. No more comp plans that anyone can’t intuitively understand.
  • Maintain positive, long-term, win-win customer relationships — as appropriate. Not every customer should ‘stay’ with a rep.  Not every rep should be involved in chasing down invoices. But reps need to do both where it’s best for the customer and company.
  • Make sales clearly, unarguably, a profit center. Not a cost center.

Great, we have the problem and the goals. But what is the solution? What’s the least risky way to get the outcomes that we want?

Inside sales reps at SaaS companies are usually paid, all-in, about 20%+- of the ACV. Often, Base+Bonus is structured 50/50, so it’s 10% or so (+- 2%) as base and a matching 10% or so (+- 2%) as bonus. And that’s OK, it’s simple.

Here’s The Plan:

  • Competitive Base Salary — But You Cover it (Including Benefits) Before Any Bonus. E.g., no commission at all each month/quarter until the hurdle is cleared.  Whatever the base is each month – $4k, $6k, $10k revenue must be brought in to cover it before you get any bonus. No commission at all until the base salary and benefits are paid off. It’s similar to a draw, but not a true draw — your base salary is a salary. (True draws are not competitive.)
  • But then, Pay 2x as Much in Commission. If the base is paid off and the low-earning reps didn’t require too much cash, the full 20-22% of ACV can be pushed straight to the rep as commission.  And even more if 80%+ of them all hit their plan. It’s what you’d end up paying in the BigCo plan anyway.  Instead of a 10-11% commission, pay ~25%. This number may change based on your unit economics.
  • One Accelerator:  Cash Up Front. Paying 25% instead of 10-12%, but only once you pay for your base salary, is itself an inherent accelerator. The sky is the limit once you’ve paid your base back. Cash up-front deals paid out directly with less for the rest. Partial-to-full comissions on any Year 2 cash. Suddenly, cash becomes a lot more valuable.
  • Optional: Payment Upon Receipt of Cash, Not Contract E-Signing. Do this if it makes a difference in cash flow. Don’t do it if it doesn’t make much of a difference.

The sky was the limit for the A+ reps with automatic sales accelerators. While quotas will still exist they become less important. The plan creates the right incentives to hit these numbers and exceed them — irrespective of what quotas are set.

Be sure to check out SaaStr’s blog for further detail and some anecdotal examples of how effective this can be. While this is just a summary, we think this is a good start if you’re looking to change how your SaaS compensation is handled especially if you’re noticing your imported Enterprise-style plan is beginning to have drooping performance.